Article 2: Different Stock Picking Approaches

There is not any single defined approach to achieve success in stock picking.

Value investing approach: Focus on investing in stocks that were selling at a discount to their fair value.

Growth Investing approach. : Focus on investing in stocks that were capable of growing at a faster pace as compared to their peers. Here you need to pay premium because of higher growth rather than buying at discount to fair value

Fundamental Analysis approach: Here, focus is on Understanding business of Company.

Technical Analysis approach: Here, focus is on analyzing charts of the past movements of a stock’s price and its trading volume over the different time periods.

Comparison Between Fundamental Analysis And Technical Analysis :

Fundamental analysis treats stock investment as a way of having ownership in a company’s business. On the other hand, Technical analysis tries to predict the next ‘up move’ in a stock’s price and is indifferent to the company’s business.

Comparison between Value investing and Growth investing Approaches:

If an investment decision goes wrong, then the risk of suffering losses is much more in growth investing, as it does not focus on the current valuation of the stock price. If a company selected by growth investing approach does not grow as expected or its growth slows down a bit, the stock market will punish its stock. In such a case, the stock prices will fall very fast and the investor might lose a lot of her invested capital.

However, in case of companies selected by value investing, if the stock market does not realize the discount available in the stock of a company soon, then its stock price might not increase in the short term. However, it would provide the investor with an opportunity to accumulate more stocks of this company. Thus value investing approach has a higher “Margin of Safety”.

 

Conclusion

Any person who wants to be an investor can learn about these approaches for stock picking. The investor can focus on the approaches which she finds suitable for her according to her temperament, work schedule, life style etc. The investor can choose to pick the best of the characteristics of various stock picking approaches and mix them to create an approach of her own.

Once the investor has decided about her stock picking approach, she should start searching for companies whose stocks meet her criteria. The investor should keep on improvising her approach by incorporating lessons, which she would learn from further readings and personal experiences in stock picking.

Article 1 : Simplifying Investing

Every investor wants to generate wealth from Investment. The objective is to have alternate source of income, which can improve the financial position of  family, lifestyle and if possible give an opportunity to retire early and fulfill all dreams. To achive this objectives, I started designing portfolio, so that I might not need to work at a job as a necessary means to earn my livelihood. After designing it, you just need to MONITOR.

Many acclaimed people have already achieved that dream through stock investments, both in India and abroad. The accomplishments of Warren Buffett and Rakesh Jhunjhunwala can be cited as good examples. Warren Buffett buys the stakes and stocks in the companies, in which he would like to, invests through his parent holding company Berkshire Hathaway.

 

Which qualities required to become Good Stock Investor?

1.       Reading:  Many successful investors have written books sharing their knowledge about stock investments. They have explained the stock picking process in a very simplified manner. Reading these books is the first step in this journey of stock investments.

    

    

My favourite is “ Reminiscences of a Stock Operator” . This book is based on the story of one of the biggest trader of wall street of his time “Jesse Lauriston Livermore”

‘How to Make Money in Stocks’ : This book is guide to understand how stock market really works….

“Rich Dad Poor Dad”:  It advocates the importance of financial independence and building wealth through investing, real estate investing.

 

2.       Patience & Emotional Control: See, Market movements are highly unpredictable. Emotions like fear, greed and frustration make investors take impulsive decisions of entry and exits during short phases of market ups & downs.

Stock market investing requires a long-term approach and you have to stay invested in the market for a long time to reap the benefits. Investors need to stay invested in stocks of good companies for long periods to make significant wealth.

“Missing out on those high-return months (the timing of which you can’t predict) can cost you a lot. A hundred dollars invested from 1926 to 2006 in the S&P 500 would have yielded $307,700, according to Ibbotson. But if you missed the 40 months with the highest returns you would have ended up with – no kidding – $1,823 only.”

When stock prices go down, many investors fail to analyze the reasons of fall in the stock prices. Some investors are gripped with fear. They sell a good company whose stock price had fallen due to general market sentiment and not due to poor performance of the company. They should actually be buying more stocks of that company at cheaper valuations. Other investors show opposite behavior and do not sell a poor performing company despite huge decline in its stock price because they hate to book losses. It is said that one should buy stocks; the way they buy their vegetables & groceries; one should buy more when prices are down.

Therefore, one needs to be in control of one’s emotions and should develop the patience to delay the short-term gratifications. One should be able to visualize the wealth, which markets are able to create over very long periods.

Reading about the behavior of successful investors and observing their actions during different phases of stock markets, will help in developing the emotional control required to be a successful investor.

 

What is not required for becoming Good Stock Investor?

1.     A Degree in Finance: Finance & investing are not rocket science. You need to get clarity on some basic concepts of finance and you would have gained the foundation to start investing. Good reading habit will help you to build on that foundation.

2.     Advanced Mathematics: You do not need to be a mathematician to succeed in stock market investing. The math you will need for investing is taught during school education. You do not require more than the ability to carry out the basic calculations

Investing requires a lot of common sense and control of emotions. If you are able to learn basic concepts, are able to read further to build upon the existing knowledge and keep patience & self-control during stock market highs & lows, then you have what it needs to become a successful investor.

How to start Investing ?

Once one has read the required books of successful authors, the person will be able to understand the basic framework about stock market functioning. She will also get to know about various characteristics and parameters of stocks to be looked into while doing stock investment. She should note down and keep a list of these parameters with her when analyzing stocks to see how these parameters apply when doing actual stock analysis.

Then she should start exploring stock markets to identify the best stocks for her.

·        Financial newspapers (e.g. Business Standard, Economic Times etc),

·        Business magazines (e.g. Business Today),

·        Stocks magazines (e.g. Dalal Street, Capital Markets etc), and

·        Websites (e.g. Moneycontrol etc.)

are good sources to start looking for potential stocks for detailed analysis.